Apple Computer (AAPL)
rose to the top of a list today, but it's a distinction that the computer maker and many other companies would rather avoid.
Apple, which has been hit with losses and declining market share as it heads for another major restructuring, ranked among the top financial underperformers by institutional investor and shareholder activist California Public Employees' Retirement System. As the nation's largest public pension fund, the system provides retirement and health benefits to more than 1 million active and retired public employees and their families.
CalPERS, which managing $108 billion, annually releases its influential top ten list of corporate America's financial underperformers based on ratings from such market gauges as the Standard & Poor's 500 Index.
The distinction of making the CalPERS list, while a dubious one on its face, might eventually be good news for these failing companies. A recent study conducted by Wilshire Associates showed that CalPERS's efforts targeted at underperformers has paid off.
The 62 companies that were targeted by CalPERS from 1987 to 1995 outperformed the S&P 500 Index by 33 percent for five years following the organization's actions.
CalPERS named Apple to the target list because of the company's downward spiral in the marketplace as buyers continue to abandon the Macintosh computer in greater numbers. Apple's shareholders have received lower returns on their investment in comparison to the S&P Computer Index since 1993.
"We have influenced [companies] by just putting them on this [underperformers] list," said CalPERS spokesman Brad Pacheco. "They will move quicker to turn around. Even though some companies are reluctant to meet with shareholders, we are longtime investors with over a million members."
Every year, CalPERS selects ten companies whose stock rank among the poorest long-term performers relative to others in the same industry. CalPERS's domestic equity portfolio contains more than 1,500 companies.
CalPERS has requested a meeting with independent directors of each company on its list to discuss issues of performance and shareholder value. Aggressive tactics will be used to improve performance, such as voting against directors and filing shareholder proposals, if companies do not cooperate.
Last week, CalPERS voted against Apple's board of directors at its shareholders' meeting and is currently scheduling a meeting with the computer maker.
According to CalPERS, two or more of Apple's directors are stretched thin, sitting on four or more boards. The pension fund is also displeased that personal stock ownership is low among most directors.
This lack of personal vested interest may not be driving the board, according to the pension fund. "As shareholders--and owners of this company--we believe that dedication of all of Apple's directors and personal incentives are critical to recovery," said Kayla Gillan, general counsel for CalPERS, in a statement.
She noted that Apple's top management lacks experience in the personal computer business, putting the company at a disadvantage in the marketplace. CalPERS is also dissatisfied with the high salaries paid to management in the wake of poor financial performance and layoffs.
According to the company's proxy statement, Apple's chairman Gilbert Amelio received a base salary of $655,061 in fiscal 1996 and a bonus of $2.334 million, bringing his total cash compensation to $2.99 million, while former chief executive Michael Spindler received $4.66 million.
Amelio replaced Spindler in February 1996.
Apple is not the only technology firm on the loser list. Other companies include Novell (NOVL), Sybase (SYBS), and Summit Technology (BEAM).
CalPERS began meeting with companies last fall and has met with independent directors at Novell and Sybase. It is also scheduled to meet with Summit Technology later this month.
"It is clear that these companies have lost their competitive edge and without intervening could emerge as financial deadweight compared to their industry peers," said William Crist, president of the CalPERS board of administration in a statement. "As 'buy-and-hold' players in the stock market, we have an economic interest and a fiduciary responsibility to our members to become a constructive voice in urging better performance."
Novell, for one, has been managed by its board of directors with the independent chairman of the board acting as CEO. "Without fundamental changes, they can't be a prosperous company," Pacheco said. "We want to make sure that they are on the right track." The organization would like to see Novell set a plan of action that includes new products.
Sybase currently has a staggered board of directors, so shareholders cannot vote for or against all directors at the same time. CalPERS wants them to restructure their board, and the company has committed to that.
"A destaggered board term gives the power to shareholders," Pacheco said. "We are sending the message that we are watching them, and we want the ability to vote against them. We are not looking for day-to-day management; we are looking to remind them that we are there."
|Top ten targets
Apple Computer (AAPL)
Reebok International (RBK)
Basset Furniture Industries (BSET)
Fleming Companies (FLM)
Rollins Environmental Services (REN)
Sensormatic Electronics (SRM)
Stride Rite (SRR)
Summit Technology (BEAM)